Thursday, September 15, 2011

Conventional wisdom says observant investors can pick up bargains when a serious downturn sinks good stocks along with the weak ones.

In fact, there is an old Stock Market saying that goes “buy on fear, sell on greed.”

The trick is identifying good stocks amid the damaged ones. Frequently, serious downturns hit some sectors of the market harder than others. A damaged stock is one that has been beaten down so much it will take a long time to regain its place in the market.

When the dot com bubble burst, it took down many good stocks with it, but it also damaged some companies so badly they never recovered and eventually merged or went out of business.

It is important to be thoughtful when looking for bargains in the middle of a down market. A big question is how far down is the stock going to drop before turning around. This is a difficult, if not impossible question to answer. Predicting the bottom of a market is a guessing game at best.

One way to get a sense of when to buy is by looking at the rate of a stock’s decline when compared to its industry sector and the market as a whole. What you are looking for is a stock that is not declining at the same rate as its peers or the market.

You can look at virtually any listed company or index and receive price information on a daily, weekly or monthly basis.

Historically, the biggest gains have come when the market makes the turn upward. Staying invested or finding some good companies (competitive advantage, low debt, a market that will rebound quickly) may be a good strategy for long-term investors.

However, you can’t know the precise moment a true upturn begins so consider if you have the time and emotional temperament to ride out more rough times before the market returns.

A good rule of thumb is be prepared to hold the stock a minimum of five years and possibly more.

The real question you must answer is: do you believe in the Indian economy and its ability to deliver the high growth rate and are you patient enough to wait for market back on track after a downturn?

If the answer is yes, then buying stock in a downturn can be good long-term investment.

Saral Gyan Capital Services

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